Monday, February 23, 2015

When one talks about Finland in a public policy context, it's usually lumped together with "the Nordic countries." However, there is one topic that everyone seems to swoon over Finland, and that is their K-12 school system. Libby Nelson over at the Left-leaning Vox just wrote a piece on "9 reasons Finland's schools are so much better than America's." Not only do people idealize it, but they go as far as saying that America should learn some lessons from Finland's successes. I'm all for learning from other peoples' successes.

My first question, however, is can we import Finland's success to the United States. The trick with comparative politics is that no two countries are alike. Most cross-country comparisons, like that between the United States and Finland, are non-analogous. Nelson actually touches upon this at the end of her article. For one, Finland is more homogenous than the United States, whether that is in racial, cultural, or linguistic terms. What makes it easier for the government to implement such an education system is economies of scale. Finland is a small, homogenous country with 5.4 million people. The United States has over 300 million people with quite the diversity. There is simply a diseconomies of scale that such a larger country has to contend with that Finland would never have to deal with on its worst days.

But let's argue that the United States and Finland are similar enough, partially because they're both Western democracies with low corruption and relatively stable currencies. Do we still want to be emulating the Finnish model? Well, that depends. On the latest rounds (2012) of the Programme for Student International Assessment (PISA), which is an international standardized test, Finland's ranking dropped from 2nd to 12th. Using a single standardized test in isolation as a sole proxy for educational success seemed odd, but maybe that's just me.

Some people might have objections to standardized testing as a proxy in the first place, which brings us to one of Finland's atypical features: no national standardized testing. It's beyond the scope of this blog entry to analyze the merits of standardized testing, but there are those who use Finland as a case study as to why America should not have standardize testing. I'd be willing to bet that teachers unions would buy into the "let's pay the teachers more to boost student performance" argument, but the problem with that is Finnish teachers are paid less than American teachers on average, even when adjusted for purchasing power parity. What I could glean from that is that teacher salary is not an important factor in teacher productivity, which is what the Finnish Minister of Education points out. For Finns, people become teachers for the career satisfaction and prestige that comes along with teaching. If United States teachers have some of the highest salaries in the world, yet cannot produce the desired results, it would be safe to assume that something else is in play. If you want to attribute it to greater spending on schools, that theory goes out the window because the Finnish government spends thirty percent less per student than in the United States, yet creates better results.

Perhaps it's the workload. When looking at teaching hours, Finnish teachers teach an average of 589 hours per year, which is 100 hours less than the OECD average, and teach four classes a day. There can be something said for teacher productivity, specifically with a declining marginal productivity when teachers become overworked, which arguably happens in the United States. There is also a matter of curriculum composition. Finland experienced an education reform overhaul in the 1970s, which included the abolishment of a 700-page national curriculum, devolution of schooling to local authorities, and creating a system in which all students were treated well. Teachers and principals are responsible for the accountability of the schools, not a Department of Education. Also, homework load is not strenuous in Finland--usually an hour a day. Finland also has a smaller average class size than in the United States, which means that the students can better receive more personalized attention from their teachers. And there's also the interesting fact that compulsory schooling doesn't even begin until age 7 for Finnish children.

There is also a cultural difference in terms of how teachers are viewed in Finnish society versus that in the United States. In terms of social prestige, Finnish teachers are right up there with medical doctors, and unfortunately, the same cannot be said for American teachers who teach K-12. Part of that has to do with the rigorous standards that come with becoming a teacher that simply exist in the United States. The social status of teachers decidedly makes a difference in terms of how unions interact with management. Both Finland and the United States have teacher's unions, but there is a qualitative difference. While 95 percent of Finnish teachers are members of a teacher union, their unionism is not compulsory like it is in the United States. I don't have a problem with voluntary unionism. It's when it becomes the belligerent, compulsory type of unionism in the United States that doesn't allow for teachers to be flexible and experimental in new pedagogical methodologies, like in Finland, that makes me wonder.

Some facets of Finnish education cannot be imported to the United States, but there are certainly facets previously outlined that can be applied to the United States to improve upon its less-than-spectacular performance on K-12 education. I hope that they are applied sooner rather than later so the United States can produce a more educated populace.

Corruption and organizational structure. China is well-known for its culture of corruption. The People's Liberation Army (PLA) is de jure a separate entity from the Chinese Communist Party (CCP), which means there is essentially no civilian oversight (Chase, Michael et al., p. 48), and essentially created a civil-military gap (p. 45). The PLA's budget is approved without any real discussion as to what the budget entails (p. 47), so it is no surprise that the PLA is going to be riddled with inefficiencies. Corruption is effectively an indirect tax because it decreases the efficiency of spending. China's significantly higher level of corruption means that it would need to spend a lot more money on the military than the United States to even become close to outpacing the United States military. Looking at the proceeding points, I find that to be highly improbable.

Estimating military size. Because of its corruption, China lacks the transparency needed for good governance. This is evident in trying to estimate the size of China's military because China's government estimates are infamously unreliable. In spite of whatever grandstanding the Chinese government might be doing, they could very well be overestimating their numbers.

Basic military strategy and geography. But let's assume that the high range of the military's budget of $132B is accurate, a figure that is less than a third of what the United States' expenditures on military spending. China is still at a disadvantage. Why?

For one, the United States has much more actual experience in military operations. By extension, the United States has military posts throughout the world, and is able to be much more responsive with its extensive military network. This also means that China does not have the same military network to deploy troops and carry out operations that would greatly expand its military clout.

Even if China were to go on the offensive, it means that China would most probably be attacking a coastline (e.g., Taiwan, Japan). Defending a coastline is much easier than attacking it, and given that the coastline is going to have U.S. military force, it would be all more difficult for the PLA to succeed.

Nuclear deterrence can be a wonderful thing, which is something the United States has. Whether or not China has second-strike capabilities, the fear of mutually assured destruction (MAD) can be adequate to make sure China doesn't agitate the United States.

Under the neorealist school of thought in international relations, balance of power theory states that national security is enhanced when one state is not so powerful that it dominates all the others. I don't subscribe to this school of thought in its entirety, but if we're so worried about balance of power, there are plenty of countries who have been historic rivals that would want to contain China's growing influence on a regional level. To name a few: India, Japan, Russia, and Pakistan. Russia's concern is going to be contingent upon its relationship with the United States, but it's safe to say that China is going to have to contend with other countries in the region that would rather not see China become too powerful.

While we're talking about borders, China borders three of some of the most unstable countries in the world: Afghanistan, North Korea, and Pakistan. China is surrounded by potential enemies and instability. The United States has two large oceans distancing it from any other country that could be remotely considered a world power.

In spite of qualms that some might have about the United States and its military reach, it still has a lot more military allies than China does. China's main military ally is Russia, and even that has historically been tenuous.

Insufficient education, training, and technology. China's military is stymied by undertrained and inexperienced officers (p. 141) who are compensated with an amount less than those in the civilian economy (p. 49). The military exercises are also counterproductive because they do not provide real opportunities for Chinese soldiers to learn from their mistakes (p. 50). China also does not have the military technology to outflank United States submarines or aircraft. Just because China is spending more money doesn't mean its spending is as well-targeted. China is woefully behind the United States on developing its military technology. For China to catch up, it would require a steep investment in new weapons and platforms, all of which are capital-intensive.

Military size. The overall size of the PLA is about 2.3 million individuals. This is not only an issue from a budgetary standpoint. Economies of scale makes it difficult to manage an army of such a size because it takes such logistical and administrative oversight (p. 53). China is also dealing with a rapidly aging populace, which means that it cannot maintain the size of its military because it will have to increase its government expenditures on social welfare programs. This also assumes that manpower is the only prime factor in warfare. However, in modern-day warfare, you also need the equipment to carry out missions.

Potential game changers. China's overall trajectory has been quite difficult to predict, but we cannot assume that the status quo will remain in perpetuity. Most notably, China's GDP cannot expand the way it has indefinitely, and is going to experience an economic slowdown at some point. If the slowdown is more abrupt, the Chinese government is going to have to make some major trade-offs with its military spending (p. 21). China also has some major potential for domestic instability. Although the CCP has been able to quash a good amount of social unrest, there is a real possibility that this might no longer be the case, which means the Chinese government would have to divert its resources elsewhere (p. 22). Also, China might antagonize its neighbors into military conflict. But China could also forge military alliances, which would reduce its propensity to expand upon its military.

Although the future is uncertain, if an educated guess had to be made, the best one is that China will have just enough muscle to make sure that the United States does not intervene in East Asia along China's border. Yes, China's military is growing, but to say that China's military is going to be on par with the United States military is just another reason to increase defense spending in America. I hope the powers that be can see that China's weaknesses are very real, and can pursue constructive relations with China instead of worrying about a bogeyman of worst-case scenario whose probability is next to nil.

Monday, February 16, 2015

Violent crime levels are at their lowest in nearly four decades, which is celebratory indeed. The question of why the rates have been on the decline is a more complicated debate. Part of it is because crime is a multi-causal element in society, and teasing out the most prevalent factors is arduous. Theories are abound, and they range from phasing out lead to abortion to improved policing to laxer gun laws. The Brennan Center for Justice, which is a law and policy institute at the NYU School of Law, recently came out with a report (Roeder et al., 2015) analyzing 14 such theories using the most empirical evidence available, an amount that was unavailable in previous years. The first theory covered in the report is that of increased incarceration.

The intuition behind the incarceration theory goes something like this: "If criminals are locked up, they cannot be out on the streets committing more crimes. Plus, once they get out of prison, they'll think twice before committing another crime." Sounds simple, yet intuitive at face value. Economist Steven Levitt wrote a paper in 2004 examining the crime rate decrease, and found that up to 58 percent of the decrease in crime rates since the early 1990s could be attributed to incarceration. However, Levitt has even conceded (Stemen, 2007, p. 8) that focusing on drug offenders instead of hardening criminals has a crowding out effect that minimizes prison's efficacy. The other issue is that Levitt's data set ends at 1993, which is when the crime rates just started to precipitously decrease. With that, let's take a look at the relation between incarceration and crime rates, like the Brennan Center did [below] (Roeder et al., p. 16).

Even if we were to assume the unlikelihood that incarceration was the sole factor in reduced crime rates, looking at the correlation suggests that the effect started to wear off by 1997. However, this is a very simplistic way of looking at it because correlation is not the same thing as causation. As the report points out, the crime rates didn't decrease as soon as the incarceration rates increased (p. 25). If increased incarceration was so vital, why did it take well over a decade after the "tough on crime" policy for it to kick in? Questions like these is probably why the report's findings were even less generous than one would have anticipated:

"Since 2000, the effect of increasing incarceration on the crime rate has been essentially zero. Increased incarceration accounted for approximately 6 percent of the reduction in property crime in the 1990s, and accounted for less than 1 percent of the decline in property crime this century. Increased incarceration has had no effect on the drop in violent crime in the past 24 years. In fact, large states such as California, Michigan, New Jersey, New York, and Texas have all reduced their prison populations while crime has continued to fall (p. 15)."

If the main benefit of mass incarceration is supposed to be a reduced crime rate, then this is a pretty damning statement of the criminal system. Why? Looking at the U.S. prison rates with a state-by-state breakdown, and then comparing that to other countries, is not flattering. How did we get to a point where our incarceration rate is so high that it shadows that of China, which is a massive human rights abuser known for incarcerating political dissidents? There's also the matter of the price of incarceration. Crime doesn't necessarily pay, but the taxpayer is paying a pretty penny for higher incarceration rates. According to the Brookings Institution's 2014 study on incarceration, we went from paying $17B in 1980 to $80B in 2010 in 2010 real dollars. That is more than quadruple the amount at the beginning of the 1980s! The fact that incarceration typically makes it on the Top Three list for largest expenditures on state budgets doesn't help any, either.

Although incarceration helps when we lock up the hardened criminals, it decidedly has a diminished effect when we lock up non-violent offenders, most notably drug offenders who mostly likely were busted for marijuana possession. This is why the Brennan report points out the effect of diminishing returns. When you lock up those who are not a real threat to society, the marginal crime-reduction gains drop substantially, which is precisely what has happened in the case of incarceration in the United States (p. 17, 19, 22). Aside from the overuse of incarceration, there is also the issue of lousy prison conditions that might actually harden prisoners even more (p. 24), which brings me to my next point.

Recidivism, which is the rate at which criminals reoffend, is still a concern because in 2005, the National Institute of Justice found that three-quarters of prisoners were rearrested within three years. Using the recidivism rate from this time period (as opposed to the current recidivism rate) is better because it will capture some of the more hardened criminals from the 1990s, which is when the crime rates really started to drop. It also doesn't help that being in prison creates stigma and social barriers that make it more difficult for former prisoners to find a new job and start a new life (Visher et al., 2010). And let's not even get into how this affects communities and families, and disproportionately so for those who are poor and uneducated (Subramanian, Ram et al., 2015).

The moral of the story here is that incarceration beyond America's worst criminals is bad policy because it does little to nothing to improve public safety (McCrary and Sanga, 2012). Canada had a similar drop in the crime rate in the 1990s to the United States, but Canada's incarceration rate actually decreased. America should be ashamed that it houses nearly a quarter of the world's prisoners while only making up for less than five percent of the world's population. If the Right-leaning Heritage Foundation thinks that we have reached a point that criminalization has gone too far, then there there has to be something do with regards to sentencing reform, or better yet, abandon the War on Drugs and the "tough of crime" mentality, both of which have been abject failures. Mass incarceration is an ineffective policy that creates all sorts of fiscal and social costs. I hope politicians can get out of the "tough on crime" mentality for long enough to realize that crime reduction policy needs to be much better targeted than what we have right now. That way, they can stop ruining lives while simultaneously passing the costs onto the taxpayer.

Thursday, February 12, 2015

The Federal Communications Commission (FCC) recently confirmed that it was going to vote on net neutrality rules later this month on February 26. The chairman of the FCC wants to use Title II of the Communications Act of 1934 to protect the Internet. For clarification's sake, Title II classification is not the same thing as net neutrality. As I had explained a few months ago, net neutrality is the idea that all data, platforms, and sites be treated equally by the government and Internet service providers (ISPs). This is about as close as a consensus definition to which one can reach. Title II classification, I'm afraid, is much more overreaching than that. Title II classification would categorize the Internet as a telecommunication service provider instead of a broadband service provider. Aside from using a 81-year old piece of legislation initially intended for the telephone industry to regulate something as non-analogous as the Internet, why do I have an issue with Title II classification?

If I had to summarize up my annoyance, it would be that the Internet is not a public utility, nor should it be treated as such. A public utility is based on the idea that a certain good falls under a natural monopoly. A natural monopoly is when it makes more economic sense, at least in terms of long-term cost, to have one company managing a certain market than it is to have a competitive market structure. Although there are some economists who think that natural monopoly theory is bunk, it is a general economic consensus that there are at least a few industries that fall under this categorization. Since the capital costs are gigantic, like we see in water or electricity, it makes more sense for those goods to act as a natural monopoly.

However, we see no such issue in broadband Internet because there is competition in the market. Neither the scope of the market nor the economies of scale result in this market being a natural monopoly. Wireless networks have lower capital costs over time. As opposed to water or gas, broadband service can be delivered in a variety of ways, whether it's with metal wires, optic cables, or wireless connection. Many physical mediums and technologies can be used interchangeably to deliver the service, whereas utilities are based on single-use-facility economics. Plus, the vast majority of Americans have choices in providers, services, speeds, and other features on their Internet service, which is more than can be said for water or electricity.

It makes zero sense to regulate the Internet as a natural monopoly when there is still a competitive market by economic definition. Looking at the economics behind a natural monopoly, it's a good thing that it's not a natural monopoly. I went back to my public policy textbook, Policy Analysis by David Weimer and Aidan Vining (p. 98), and I actually found that it's considered a market failure because it creates allocative inefficiency (e.g., see diagram below).

From an economic welfare standpoint, deadweight loss is bad, especially for the consumer. Rather than pay the price at the equilibrium point under a competitive market (Pc), consumers now pay a higher cost at Pm. The economic theory makes sense. Back in December, the Progressive Policy Institute released a study saying that Title II classification would increase federal fees per household by $17 per annum, and that doesn't even include $67 in state fees or $72 in local fees per annum. Although that might not sound like much, when it all adds up, it will cost America over $15B per annum. If you need to think about it further, just think about how poorly actual utilities are handled, and ask if you want that low quality for your Internet. After all, are public utilities well known for quality customer service, upgrades, or technological innovation?

Let's not get into how Title II regulation wouldn't prevent paid prioritization or some of the other finer points that would translate into further government overreach. Broadband Internet does not possess the most basic characteristics of a public utility, and there is no reason to treat it as such. It is a variable service (unlike an actual utility), a constantly changing technology, and needs to be [relatively] free of regulation if it is to continue proliferating. The cry for net neutrality dates back to the 1990s, yet we haven't seen the Internet die. If anything, we went from stationary dial-up to the wide array of satellite, cable, mobile, and WiFi products with greater speed and less cost in less than two decades because the government has by and large stayed out of the way. As a result, America has enjoyed better broadband quality than its European counterparts (Yoo, 2014). It's Moore's Law at its finest! If you want to have some sort of regulation, use antitrust and consumer protection laws that are common in many other markets. Otherwise, remove the red tape, deregulate the local bureaucracy, and watch the market expand even further.

6-22-2017 Addendum: Here is some nice coverage from FreedomWorks on why repealing Title II won't lead to a broadband monopoly.

7-15-2017 Addendum: The American Enterprise Institute came up with a nice report on how Title II harms consumers and innovators.

Wednesday, February 4, 2015

It looks like those Republicans are at it again. Yes, they are looking to "audit the Fed" (see proposed bill here). As the argument goes, the Federal Reserve is not under enough scrutiny because of the exemptions they receive from being audited by the Government Accountability Office (GAO). The intuition behind it seems sound enough. The purpose of an audit is to determine whether the information presented in a certain financial report reflects the entity's actual state of financial affairs. If the Federal Reserve is going to pass overarching monetary such as quantitative easing, shouldn't the American people have a right to know how money is being generated or allocated?

The catch here is that the Fed is already being audited. The GAO has done it, and consulting firm Deloitte audited the Federal Reserve Bank of New York (FRBNY) in 2012. The Fed also releases its minutes from its Federal Open Market Committee meetings. In spite of what is nominally done, I have to wonder just how thorough the audits actually are. If the current audits are already adequate, then the "Audit the Fed" bill that Rand Paul is trying to pass would be superfluous at best. However, Federal Reserve Chair Janet Yellen doesn't want the bill passed.

The issue is not that it's a standard audit, but if you look at the proposed bill itself, it also includes greater oversight and, even more importantly, program evaluation. As the Cato Institute brings up in its recent analysis on the matter, the Fed has enough exemptions from he the GAO in terms of more thorough auditing, something which the "Audit the Fed" bill seeks to rectify.

One of the arguments that Yellen makes is that it would kill Federal Reserve independence. Do you honestly think the Federal Reserve acts independently when the President of the United States is the one who selects the seven members on the Board of Governors, amongst whom the President selects a Chair of the Federal Reserve? Not only is there not a true sense of independence, but there are a small select group of people who have immense influence over the purchasing power of the dollar.

Release of aggregate data would help determine taxpayer exposure risk, as well as how well the Fed is handling its job. Information on specific transactions would even provide insight into who is receiving favoritism from the Fed (read: rent-seeking). The Congressional Research Service (CRS) points out that greater transparency would not only help market actors make better decisions, but that more transparency would make for more effective monetary policy (CRS, p. 11). Critics of "Audit the Fed" really think that this would hamper Fed efficacy, but this goes on the erroneous assumption that the Fed does a good job at managing monetary policy. It would be nice to know things such as how Federal Reserve policies have either helped or harmed the economy (e.g., Did quantitative easing work? Did the Fed contribute to the housing bubble, and if so, how badly?). I think that the Fed has too much overarching power, which is another topic for another time. But if one is going to at least argue that the Fed is going to have such power, wouldn't it make sense to hold them accountable via greater oversight and make sure they're doing a good job? Is that really too much to ask?

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